Why does the Sep 07 10$ Call on SWHC have such a rich premium?

C

ChadtheRTF

I understand that much of this has to do with the call already being so far in-the-money, but could this also be a result of the underlying's volatility? And also, because the premium is so rich, would selling this call be a good covered call strategy, as the covered writer would have over a fifty percent downside hedge?

-Chad
 
The call is $9.6 ITM, and the current quote is 9.40 bid - 9.70 ask. It's trading at parity!

What richness are you referring to!?
 
Heh, I thought this over after I posted this and realized that there is no richness, because the option would be exercised at 10 bucks, most likely resulting in a loss for the option writer.
 
Chad:

No. That is not a good strategy. That call is as far ITM you can go.

Chances are, you will be assigned and have to sell your stock.

Also, volume on the stock is crap. (not even 300K)

I believe that the farther ITM the option, the less interest the people have.

A better strategy would be selling the $20 or $22 call as they are OTM and you have a much better chance of keeping your stock.

You should follow it and do a virtual trade or something to see what would happen.

Looks to me that this stock will move up another 2.30+
Covered call is a neutral to bear outlook. Unless you think the stock will fall below $10 in the first 1/2 of the next day I would say no no no.

-- You should read more about the covered call.
AND the married put. :)

Finally, I see no major volatility in this stock.

Hope that is helpful. :D
 
Quote from ChadtheRTF:

Heh, I thought this over after I posted this and realized that there is no richness, because the option would be exercised at 10 bucks, most likely resulting in a loss for the option writer.
More...

10 doesn't have anything to do with this! An option can be exercised at any time, particularly when it is trading at parity.

Look at it this way, if you sell the option in the market you'd have to sell at the bid of 9.4,which is under parity (this is an illiquid option on an illiquid stock, it is very doubtful that you'd be able to shave anything off of the bid ask spread). Therefore, you may be better off (depending on costs) exercising the call to capture the full intrinsic value.
 
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